Self Directed IRA's - How to Take Control of Your IRA, 401K, SEP, Simple, Keogh or other retirement accounts to purchase property
You can use some or all of your retirement savings without penalty to purchase property in Costa Rica, I explain how below. It can be in nearly any type of retirement fund, 401k, IRA, SEP. Simple, etc but you will have to convert it to a "Self Directed IRA" and have it overseen by a qualified intermediary. I have personally done just that and can recommend a great intermediary firm that provides you with "Checkbook Control" of your retirement savings to invest as you please (within the guidelines of qualified investments). Contact me at Steve@PacificLots.com if you want more information on how to take control of your retirement savings.
Self-directed IRA real estate purchases can be a convenient and rewarding investment. In today’s economy, with many properties being snapped up at sub “priced-to-sell” prices, thousands of self-directed IRA holders are aggressively growing their accounts by investing their funds in domestic, commercial, rental and foreign real estate purchases.
Those using self-directed IRA LLC structures enjoy even more benefits. This vehicle—structured by a handful of financial services companies—enables checkbook control of funds and allows account holders to make on-the-spot purchases while avoiding time-consuming custodial permission processes and transactional fees.
Thanks to these many advantages, “real estate IRAs” (as some people call self-directed IRAs) are rapidly gaining in popularity. Yet, despite, this growing interest, many have never considered the one particularly attractive possibility these types of accounts present: buying a retirement home now—at today’s prices—to occupy after retirement age has been reached.
Buy now, occupy later
You may have said yourself while strolling down some scenic street, “I’d love to retire here. But by the time I actually retire, I won’t be able to afford the real estate.” The great news is you don’t have to wait.
If you already have an IRA, 401(k), 403(b), SEP, Roth, or other retirement account with substantial funds in it, you can roll that money into a self-directed IRA then use that capital to purchase the retirement home of your choice as rental property. Since this investment is done on behalf of your retirement account (and not you personally), the income you receive from rental payments is realized tax-deferred within your account.
Limitations on IRA assets
Due to conflicts of interest, neither you nor a close relative can live in the home now, as this would be considered a prohibited transaction with a disqualified person (IRC §4975(c)(1)(a)). However, you can hold onto the property, lease it out to “arms-length” renters, build your retirement account with the rental payments, then take the real estate as a distributed IRA asset when you can take distributions penalty free (after age 59 and a half). After that, you can move in and enjoy the home you’ve waited so long to occupy!
Benefits of IRA LLC vehicles
If you have a self-directed IRA LLC vehicle, you have an added advantage. With this structure, you can act as your own property manager—a role disallowed with traditional self-directed IRAs. You’ll be able to buy rental properties as an IRA investment and be your own property manager (landscaper, handyman, roof repairer)—potentially saving hundreds to thousands in fees you might have to pay others to manage the property.
Taking the property out of the account
Do be aware that you will need to pay IRA distribution taxes based on the fair market value of the property at the time you take it out of the account (determined by a then-current written appraisal) and according to whatever tax bracket you are in at that time. If, by that time, you happen to be in a lower tax bracket, the savings could be substantial.
And if you invested in the real estate using a Roth IRA, you might save even more. Because your taxes were already paid upfront, you will not have to pay any taxes when you take the property as a distribution to use personally.
Conclusion
Self-directed IRAs have already enabled thousands to grow their funds with rental money from their future retirement home—and thousands more to enjoy life in the retirement home of their dreams. Ask any of these folks what they think of the arrangement, and more often than not, they’ll tell you that buying you future retirement home now could be the best “real estate IRA” investment you ever make!
A Self-Directed Individual Retirement Account is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. You are not limited to purchasing stocks or bonds with your retirement funds, even if you are no where near the age of retirement. You are free to invest your funds in any qualified investment including real estate, rental properties and even raw land. These investments can be in the US or abroad.
IRS regulations require that either a qualified trustee, or custodian hold the IRA assets on behalf of the IRA owner. Generally the trustee/custodian will maintain the assets and all transaction and other records pertaining to them, file required IRS reports, issue client statements, assist in helping clients understand the rules and regulations pertaining to certain prohibited transactions, and perform other administrative duties on behalf of the Self-Directed IRA owner for the life of the IRA account. Self-Directed IRA accounts are typically not limited to a select group of asset types (e.g., stocks, bonds, and mutual funds), and specialized self-directed IRA custodians will permit their clients to engage in investments in most, if not all, of the IRS permitted investment types (an almost unlimited array of possibilities including foreign real estate). Some of the additional investment options permitted under the regulations include, but are not limited to, real estate, stocks, mortgages, franchises, partnerships, private equity and tax liens. Self-Directed IRAs, by allowing a wide range of investment choices, improve the account owner's opportunities to diversify their IRA portfolio(s). Some investments, such as life insurance or collectibles as defined by the Internal Revenue Service, are not permitted in IRAs.
If real estate or any other investment asset held in a Self-Directed IRA has been employed for personal use, or to gain any other personal benefit (other than a return for the IRA), in the view of the IRS or the Department of Labor, the IRA(s) may become immediately taxable. In addition, if the IRA owner is younger than 59 1/2, the IRA will be subject to an early withdrawal penalty of 10%. It is important, however, to understand that the IRA account holder is responsible for compliance with all codes and regulations. While a custodian's job is to follow the directions of the account holder as a non-discretionary trustee, a custodian cannot ensure compliance or give legal or tax advice. Therefore, those interested in Self-Directed IRAs should seek education offered by an unbiased source.
For more information on using your retirement funds to invest in property in Costa Rica, please contact Steve Linder at Steve@Pacificlots.com.
IRS Rules and Regulations on Retirement Funds
New York Times Article about Self Directed Retirement Funds
New York Times Article about Using your IRA for "other" investments